Mineral Liens: Collecting Unpaid Debt for Oilfield Service Companies

Purpose and Application of Mineral Liens

Everyone in the construction industry is intimately familiar with the “Mechanic’s Lien,” which gives a security interest in the title to real property (and sometimes personal property) to those who have supplied materials or labor to improve the property. In some jurisdictions, the liens are broken down further into sub-groups, such as the the “Materialman’s Lien,” “Construction Lien,” “Supplier’s Lien,” or “Laborer’s Lien.” But one lesser known type of lien can be crucial to oilfield service companies in collecting on debts owed to them: the Mineral Lien.

Liens are similar to a sort of mortgage or deed of trust on the property, acting like a cloud on title, and having the effect of hooking the owner into paying you for your services or labor before selling, financing, or refinancing the property. Mineral Liens were designed specifically for companies like oilfield service companies, to give them an easier route to collecting their debts, and receiving money rightfully owed to them.

Special Rights Enjoyed Under Mineral Liens

Mineral Liens, covered by Chapter 56 of the Texas Property Code, give oilfield service companies special rights and status as a creditor in collecting their debt. A company that supplies computers, or furniture, for example, typically would not qualify for a lien, and so they are required to go through a seemingly endless and arduous process of filing a suit, waiting for trial, obtaining a favorable judgment, then obtaining and enforcing a judgment lien. And throughout this entire expensive path, these companies have no security for their debt!

An oilfield service company, on the other hand, can take advantage of the lien laws, giving them preference over other types of creditors, automatically giving them a “date of preference” as to the date the first services were rendered or materials were supplied. And as an added benefit, all mineral lien claimants are of equal status, no matter the date of services/supply of materials. This is because all mineral lien claimants date of preference relates back to the first date of work of the earliest lien claimant!

This can be huge for oilfield service companies, because often this pushes their priority ahead of many other types of lienholders. For example, say All-Continent Services, Inc. supplies materials or services on 2/1/2014, and two days later the Operator executes and files a Deed of Trust with Wells Fargo Bank. Two months later, in April, Benjy Oilfield Services Co. supplies additional services, and the Operator fails to pay the invoice to Benjy. Who has priority between the Bank and Benjy? Conventional creditors achieve their priority primarily through a simple “first in time, first in right,” and here the Bank is first in time compared to Benjy. However, because Mineral Liens relate back to the first day of work of the earliest lien claimant, Benjy’s Mineral Lien would have priority over Wells Fargo, assuming All-Continent also files a lien.

Furthermore, a mineral lien against a well is effective against all wells on the lease, and the entire unit or pool with which the lease may be pooled or unitized.

But this powerful device comes with a pricetag: exacting and precise procedural requirements, including relatively narrow timing and notice requirements. If you do not do it right, you will be thrown out of court. Even worse, costs and attorney’s fees can be assessed for failure to remove an invalid mineral lien.

Steps to Perfect a Mineral Lien (in Texas)

1. Identify the Well and Chain of Contract

The first step may be better called a “pre-step,” because it is best handled before a dispute arises. Contractors often prefer to identify wells by reference to the API number. An API number is a “unique, permanent, numeric identifier” assigned to each well drilled for oil and gas in the United States.

The best and easiest time to gather this information is up-front, in a job information sheet or other job-intake form. Additionally, any employees actually sent out to the field should be able to note the API number, and the “blank” for this number is often added to a relevant form used in the field during operations. For suppliers, it is important to gather this information before shipping any materials.

2. Send the Requisite Notice

After a collection issue arises, first, we typically recommend that all clients provide notice of intention to file a lien. After receiving this notice, we often see that operators really start to pay attention, because it often gives a strong incentive to cooperate and negotiate. In this regard, this notice functions similarly to a “Demand Letter,” in giving the debtor push or incentive to finally come to the bargaining table.

However, technically speaking, only “mineral subcontractors” are required to send notice under Texas Law. Generally, a “mineral subcontractor” is a company that provides materials or services, and has no direct contact with the mineral owner (which under the Texas statute includes lessees).

As a side-note, one major road-block for mineral subcontractors are they they are often directly hired by the operator, but the operator is often a subsidiary of the lessee, but not a lessee itself!

3. Identify the Lease, Legal Description of the Land, and Working Interest Owners

Unlike most instruments affecting title to real property, such as a conveyancing instrument, assignment, deed, or stipulation of interest, a Mineral Lien is not subject to the stringent requirements under the Statute of Frauds. This is because, according to Texas Law, the mineral lien statute is to be liberally construed in favor of lien claimants. In this regard, the 5th Circuit has approved use of Railroad Commission plats of the well/lease referenced and attached to a lien as being sufficient for a property description. Nevertheless, this is often the most time-consuming task.

If this information is not readily available, your attorney may suggest hiring a landman to search for, and copy, the relevant real property records. These records can then be used by the attorney to examine the chain of title and identify the record title working interest owner(s), lease and legal description. This information is all crucial to the Lien Affidavit described in the next step.

4. File the Lien Affidavit.. correctly and on time!

When to File: In Texas, a Lien Affidavit must be filed within six months after labor or materials were last furnished. One word of caution is that you should not wait until the last few days, as county clerks sometimes fail to record lien affidavits on the same day they are received. Note: due to a specific exception, Mineral Liens can be filed post-bankruptcy petition without being considered a violation of automatic stay!

name of person or entity for whom labor was performed or material was furnished/hauled;

a statement that the “mineral subcontractor” timely served written notice that the lien is claimed on the property owner, or his agent, representative, or receiver.

Where to File: in the county in which the lien property is situated.

5. Send Notice of the Lien Affidavit

Again, this isn’t required, but is a smart move. Similar to a “Final Demand Letter,” this letter informs the parties that the lien has been filed. We recommend sending this notice, because it can serve to give the debtor one final push to resolve the issue prior to suit being filed. Once a suit is filed, all parties involved will incur additional costs, not to mention the time involved. Many debtors will realize this and avoid it by resolving the debt before the suit is filed.

6. File Suit

The final step, if the debtor hasn’t already resolved the issue, is to file suit. Suit must be filed in the county in which the lien is recorded, within two years of the deadline to file the lien affidavit. If the Operator becomes subject to bankruptcy proceedings, the mineral lien claimant must file a notice of perfection in the bankruptcy court in lieu of filing a lawsuit.

Austin represents oil and gas exploration and production companies and landowners in a wide variety of complex commercial litigation matters, including contract and property disputes, royalty disputes, breach of lease cases, lease termination/perpetuation disputes, and an array of other issues in the upstream oil and gas sector. Austin has prosecuted and defended claims in state courts and federal courts. Austin strives to find practical business solutions to complex issues, but if necessary, he works hard to implement effective strategies in the courthouse.

This is a great article Austin. How can a mineral lien be applicable if there is no producing well on the leased area? I’m thinking about situations where lease buyers get stiffed and it may be several years before a well gets drilled, and they subject leases (or portions thereof) might be sold a few times in the process.

Thanks for the comments, Randy, and good question by the way. Texas Property Code § 56.003(a) describes the property that is subject to a mineral lien, and it is relatively broad coverage. It includes “(2) the land, leasehold, oil or gas well, water well, oil or gas pipeline and its right-of-way, and lease for oil and gas purposes for which the labor was performed or material, machinery, or supplies were furnished or hauled, and the buildings and appurtenances on this property.” So this already covers the lease and leasehold interest, thereby also covering and including future wells. It goes even further in subsection (4), to include “other wells and pipelines used in operations related to oil, gas, and minerals and located on property listed in Subdivision (2).” But one problem in your hypo is that if “several years go by,” you may have missed your filing deadlines.

10/2012 – John Smith buys leases for Blackacre Production
11/2012 – John Smith assigns leases under agreement requiring 90 day payment of invoices. Let’s just assume that Blackacre paid the bonuses, and they just owe John Smith payment for services.
02/2012 – Non payment of invoice and John Smith sends proper notice.

Ok let’s assume from here on out John Smith fulfills all the requirements in the law — is his mineral lien good only against a well drilled in the future, or is his lien valid against a sale of working interest in the leases?

Well this is a little bit interesting. First, when he purchased the leases and when he brokered the deal with Blackacre, he was working for himself. He was never under a contract to perform for Blackacre, but only working for himself and brokered a deal with Blackacre. Second, when he made a transaction with Blackacre, Blackacre was not yet a mineral owner. Even if some of the above had a nuanced argument or fact-detail to the contrary, which I suppose could be possible, I would say that brokering is probably not the type of work contemplated by the statute.

John Smith would be better protected if he were to refrain from assigning leases until the money, or a deed of trust, is in hand. Just as people don’t hand over keys to a car, it isn’t a good idea to hand over valuable leases without consideration. Again, you could potentially draft a Deed of Trust to have “after-acquired” property language in them so that the deed of trust could be signed up front, which could then allow him to use this 90 day option.

P.S., thanks to my colleague, Kevin Koel, for his help with this interesting little hypothetical. Kevin has a great deal of experience in several states with liens.

The intent of my hypo was that John Smith was buying the leases under contract for Blackacre Production.

In this situation it usually works one of two ways:
1. The broker buys them in their own name (John Smith, Lessee), and then assigns to the client — typically they will be advanced bonus money or pretty simultaneous wire transfers will take place because of the large amounts of cash you can burn on lease bonuses.
2. The broker buys them in the clients name (Blackacre Prod, Lessee).

In either of these cases I’m not assuming that anyone is out money on the lease bonuses, but the payments of invoices for actual services (dayrates) can lag 30,60,90 days (or more of course). I’m primarily thinking about these laggy invoices that very occasionally never get paid.

It sounds like it still isn’t covered by the statute, so it would be interesting to hear about the process a independent landman or attorney would take if they were stiffed on an invoice. Let’s say for “Title Research” purposes for determining who to purchase a mineral lease from, where leases were subsequently bought and delivered (by other parties).

Now I remember why I hate hypos — they just keep changing them hoping to stump you.

I would say this certainly could change things. Especially if the leases were in Blackacre’s name. Even if a lien is not applicable (which in the right situation it definitely could be), there are other good avenues for getting paid. First, a simple demand letter, threatening that if the account is not closed, you will be forced to file suit… I’ve had great success with these letters, simply because it gets the issue in front of the right people, and let’s them know that it is serious. There are also other liens that may be applicable, including vendor’s lien (if the leases were taken in his name), equitable lien, or later if he gets a judgment in his favor, which sounds like it shouldn’t be much of a problem in this particular hypo, then he could also get a judgment lien.

In other words, there are “several ways to skin a cat” so the best move would be to take your specific circumstances, and chat with an atty about the game plan. You can discuss how strong the letters will be, and how far you want to go. This can be particularly useful if you are dealing with a client you hope to retain, but need to let them know you want/need to be paid.

These are great hints. I haven’t dealt with this personally, but I imagine it can be frustrating to find an attorney who can help you that doesn’t have an existing relationship with the larger operators.

You have a good point there as well. May have to ask around a bit. However, I don’t think attorneys would have too hard of a time accepting the case, assuming there is no conflict, because the accounts receivable department is not exactly the same department they are looking to work with as a client…

I guess I’m just saying that I don’t think the issue should typically scare attorneys away from taking the case for fear of creating “bad blood” with a potential client.

That’s great to hear, Kari! If you need any help feel free to shoot me a call. We have created pre-made forms for most states, and have compiled the processes and rules applicable in most states into a reference set for our own use… no problem to draft something up, doing the filings and notices, and/or give you some tips about doing the title search if necessary.

Mr. Brister, I have read this article several times in my search about mineral liens in Texas.
My main question is if a lease terminates(due to breach of lease) will the mineral owner/surface owner be responsible for the liens incurred by the original Lessee? Whatever the answer is could you point me to the information that confirms the answer. Your reply and help will be appreciated.

The general answer is no. The mineral interest attaches to the leasehold interest, and if that expires, then there is no longer any interest to attach the lien to. However, there are two exceptions to this general rule: (1) where there was fraud in purposely trying to extinguish the lease (we have seen this where the lessee purchased a top lease hoping the lien would only attach to the old lease), and (2) there is a good argument that the lien still attaches to the wellbore, because the wellbore can be construed as being “equipment.”

Thank you so much for your reply and answer. I’ve been searching for months to find this answer. It is a big help in helping me understand how mineral liens will affect a oil and gas lease if it expires or terminates. Again, I thank You for your reply and information, Donna

Mr. Brister – I have a question regarding work as a Landman. A Landman, working as an Independent Contract is engaged by Party “A” to abstract the mineral title in a tract of land (Texas), determine the mineral owners and the amount of their respective Mineral Estate. The Landman makes the offer to purchase the Mineral Estate from current owners and Party “A” makes the required payment for the Interest. The Landman completes the Mineral Deed, files same for record and completes the purchase process. Then Landman submits an invoice for services rendered and Party “A” simply refuses to pay for the Landman’s services. Can the Landman file a Lien Affidavit against the Mineral Estate? Thank you.